European publishers merge to take on Amazon

Penguin, Pearson venture to beef up technology

October 29, 2012|Reuters

Two vintage Penguin paperbacks are photographed in a book shop in London Monday. (Stefan Wurmuth/Reuters)

Britain's Pearson and Germany's Bertelsmann are to merge their publishing units, Penguin and Random House, to recover ground lost to technology groups Amazon and Apple, the leaders in the ebook revolution.

Education and media publisher Pearson said the joint venture, which will bring under one roof fantasy novelist Terry Pratchett, "Fifty Shades of Grey" author E L James and 2012 Nobel prize winner Mo Yan, would be named Penguin Random House.

Confirmation of a deal came after months of Pearson board discussions and despite an informal approach from Murdoch's News Corp., which was interested in combining Penguin with its own Harper Collins publishing unit, a person familiar with the situation said.

"The consumer publishing industry is going through a period of tumultuous change, propelled by digital technologies and the giant companies that dominate them," Pearson Chief Executive Marjorie Scardino said in an email to staff.

"The book publishing industry today is remarkable for being composed of a few large, and a lot of relatively small companies, and there probably isn't room for them all -- they're going to have to get together."

Under the plans, Bertelsmann will own 53 percent of the venture and nominate five directors board, while Pearson would own the rest and nominate four. Both must retain their share in the venture for at least three years.

Penguin Chairman and CEO John Makinson will be chairman of the new venture, and Random House CEO Markus Dohle will be CEO.

Analysts said they would have preferred a bid from a group such as News Corp., which would have brought cash into the company and enabled Pearson to quit a market that has been hit by the rapid growth of the ebook and the control it has given to major distributors such as Amazon and Apple.

The industry has also been hit in certain markets such as Britain by fierce pricing pressure from supermarkets.

Pearson said the merger would provide significant synergies and the opportunity to spend more on the new technologies transforming the industry.

"Together, the two publishers will be able to share a large part of their costs, to invest more for their author and reader constituencies and to be more adventurous in trying new models in this exciting, fast-moving world of digital books and digital readers," Scardino said.

The two groups did not break out the potential synergies but said they would save money on joint warehousing, distribution, printing and central functions. Bankers UBS estimated possible savings of 10 percent of their combined cost base.

A joint venture will also allow Pearson to retain a link between its education division and the world-renowned Penguin brand. And it also avoids a large tax bill in the United States which would have been incurred had Penguin Books been sold.

"We can see why Pearson has chosen this option, but there may be some disappointment there is no outright sale, and especially with the lock-in of the stake," Liberum said.